Disney’s third-quarter revenue rose 4% to $23.2bn, ahead of market expectations as all business segments saw growth. In the Entertainment division, declines in linear (traditional) networks were more than offset by double-digit growth in direct-to-consumer content, which includes Disney’s streaming brands.
Operating profit rose 19% to $4.2bn. Subscriber revenue growth and cost savings nearly tripled profits in the Entertainment division, more than offset single-digit declines in the other divisions.
Free cash flow rose from $1.5bn to $4.5bn, due to improved cash generation. Net debt rose from $32.2 to $41.6bn since the start of the year.
Full-year earnings per share (EPS) growth guidance has been raised from 25% to 30%.
The shares were broadly flat in pre-market trading.
Our view
Disney’s third-quarter results came in ahead of market expectations, as its collection of streaming services posted its first-ever profit.
Growth of Disney+ has been phenomenal and the service quickly emerged as a worthy opponent for industry titans. The part that gives Disney an edge is its pre-existing stable of intellectual property. It has a pre-loaded and pre-approved content cupboard. Disney is well-placed to capture demand. But every story has a villain.
Disney+ has grappled with eye-watering costs. Getting a streaming service off the ground is not a cheap undertaking. Nor is attracting customers, especially in the early stages. But with most of the groundwork now in place, operations are being streamlined. That’s delivering huge cost savings and helping boost profitability.
The competitive landscape remains very tricky, so continued success will hinge on delivering new content to keep eyes on screens. Subscriber numbers are edging in the right direction. And while we admire Disney's position, consumers are fickle beings, and there's no guarantee Disney will reign supreme. but that can change in a flash.
Streaming being a long-term success is important because Disney's broader media business is heavily exposed to traditional linear TV. Cable to you and me. We think the likes of ESPN is a great asset, especially its streaming potential, but the legacy industry is in structural decline.
Then there's the theme parks. These are another way for Disney to juice the same intellectual property for cash over and over again. We continue to think parks are a strong asset, with loyal fans likely to flock to the gates for years to come. But this part of the business is more likely to see peaks and troughs. A tough economic landscape will see families reduce spending, and we’re starting to see signs of that weighing on performance.
At nearly $42bn, Disney is carrying a fair whack of debt. A lot of that's a hangover from the mega-merger with Fox. The group's substantial free cash flow means we aren't overly concerned, but debt management could take precedence over the medium term and will need to be monitored.
There’s no denying it, Disney’s an excellent brand. But growth in the streaming business is likely to be the main driver of sentiment in the near-term. We’re happy profits have started to flow in from this side of the business, but given the highly competitive landscape, we’d like to see more evidence of progress before getting too excited. And as always there could be ups and downs along the way.
Disney key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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